Heterodox economics challenges traditional economic theories and methods, including the neoclassical synthesis and rational choice theory. It encompasses various schools of thought that disagree with each other and reject mainstream economics’ assumptions about individual behavior and the definition of the economy. Many heterodox economists argue that the economy is difficult to track and that people’s choices are often influenced by limited information, leading to seemingly irrational decisions.
Heterodox economics includes the methods and theories outside traditional economics. It is an umbrella term that links various schools of economic thought, many of which disagree with each other. A common criticism, however, is that the neoclassical synthesis – a combination of earlier economic theories – is inherently inaccurate. Another heterodox criticism is the methodology used by other economists. Many heterodox economists reject rational choice theory, the assumption that individual choices will reflect rational decisions.
The term heterodox connects hetero “different” and –dox from orthodox. Literally, heterodox economics means “different from orthodox economics”. Heterodox economists disagree with one or more central tenants of mainstream economic thought.
Mainstream economics, the economics accepted by the majority of economists, is a combination of previous economic theories. Neoclassical economics focuses on free markets that will achieve efficiency through supply and demand. Keynesian economics, named after the British economist John Maynard Keynes, argues that a significant amount of government intervention is needed for economic efficiency. Modern mainstream economics is largely a combination of elements of these two theories.
The blend of neoclassical and Keynesian economics had been dubbed the neoclassical synthesis. In particular, neoclassical theories are mainly applied to microeconomics, the study of individual decisions in an economy. Keynesian economics, on the other hand, is primarily applied to macroeconomics, the study of an economy as a whole. Many theorists in the heterodox school of economics reject part or all of the neoclassical synthesis. They argue that it places constraints on a fuller understanding of economic activity.
Many heterodox economists criticize the methodology of mainstream economics. At issue may be the definition and scope of the economy itself. The economy is inherently difficult to track because it is so interconnected with other psychological and social phenomena. Another common topic in heterodox economics is the boundary between experimental and theoretical approaches. In other words, economists disagree about which assumptions about individual behavior can be made without first gathering supporting evidence.
Indeed, mainstream economics generally assumes that people will behave as rational agents. This means that they will tend to act in ways that maximize their material conditions and well-being. At issue, however, is how to define a term like “well-being” and whether people actually act in seemingly rational ways all the time. Some heterodox economics schools challenge the assumption that people generally make rational decisions. Rather, people’s choices are often skewed by limited information to cause them to act in seemingly irrational ways.
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